Taxing goods with very inelastic demand generates less deadweight loss than taxing goods with very elastic demand because

Question

Quizplus · Accepted Answer

Goods with very inelastic demand have very limited substitutes, which means consumers are less likely to change their behavior in response to a tax increase. As a result, the deadweight loss (i.e., the loss of economic efficiency due to the tax) would be smaller compared to goods with very elastic demand, which have more substitutes and thus consumers are more likely to change their behavior in response to a tax increase.

Taxing Goods with Very Inelastic Demand Generates Less Deadweight Loss